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Near-Rationality and Inflation in Two Monetary Regimes

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  • Laurence Ball

Abstract

Sticky-price models with rational expectations fail to capture the inertia in US inflation Models with backward-looking expectations capture current inflation behavior but are unlikely to fit other monetary regimes This paper seeks to overcome these problems with a near-rational model of expectations In the model agents make univariate forecasts of inflation: they use information on past inflation optimally but they ignore other variables The paper tests sticky-price models with near-rational expectations for two periods in US history the post-1960 period of persistent inflation and the period from 1879 to 1914 when inflation was not persistent The models fit the data for both periods; in contrast both rational-expectations and backward-looking models fail for at least one period

Suggested Citation

  • Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," Economics Working Paper Archive 435, The Johns Hopkins University,Department of Economics.
    • Handle: RePEc:jhu:papers:435
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    References listed on IDEAS

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    1. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
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    6. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-1275, December.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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